No. 2012-cv-2073
IN THE
UNITED STATES COURT OF APPEALS
FOR THE FOURTEENTH CIRCUIT
__________________________
OCTOBER TERM 2012
__________________________
Frank Kipp, As Trustee for the Hicks Irrevocable Life Insurance Trust, and
Presidential Holdings, LLC.,
Appellant,
v.
Guaranty Life Insurance Company,
Appellee.
__________________________
ON APPEAL FROM THE JUDGMENT OF
THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW TEJAS
__________________________
BRIEF FOR APPELLEE
__________________________
Team # 62
Attorneys for Appellee
November 19, 2012 QUESTIONS PRESENTED
I.
Did the district court properly declare the Policy void ab initio for its lack of a
good faith insurable interest or for its fraudulent misrepresentations, both of
which are indicative of an illegal STOLI scheme?
II.
Should Guaranty Life be required to return the premiums to the Investors,
despite being fraudulently misled and taking a proactive engagement in
investigating the STOLI scheme?
i
TABLE OF CONTENTS
Page
QUESTIONS PRESENTED ...............................................................................
i
TABLE OF AUTHORITIES ...............................................................................
vi
OPINION BELOW ..............................................................................................
1
STANDARD OF REVIEW .................................................................................
1
STATUTORY PROVISIONS ..............................................................................
2
STATEMENT OF THE CASE ...........................................................................
2
Statement of Facts ...................................................................................
2
Procedural History ...................................................................................
7
SUMMARY OF ARGUMENT ............................................................................
8
ARGUMENT .......................................................................................................
9
THE POLICY IS VOID AB INITIO BECAUSE IT LACKED AN
INSURABLE INTEREST AT ITS INCEPTION AND BECAUSE IT
WAS PROCURED THROUGH FRAUD. ................................................
9
I.
A.
Because the Policy Was Procured as Part of a STOLI Scheme,
It Lacked an Insurable Interest, Thus Making It Void Ab
Initio. ..............................................................................................
1.
To accomplish New Tejas’s legislative goal to prevent
cloaked wagering policies, a good faith standard should
be read into its insurable interest laws. ............................
a.
b.
10
11
Other courts have consistently read a good faith
requirement into insurable interest laws to
prevent STOLI transactions disguised as
legitimate life insurance policies. ...........................
12
By amending section 1409, the New Tejas
Legislature has expressed its intent to require a
good faith insurable interest. ..................................
13
ii
TABLE OF CONTENTS (CONT.)
2.
The assignment of the Policy to Presidential
demonstrates a lack of good faith in the creation of the
Policy, thus making it void ab initio. .................................
a.
14
The Trust and Presidential had a pre-existing
agreement to assign the Policy before its creation.
15
The swiftness of the assignment to Presidential
makes it unlikely that the Policy was procured in
good faith. .................................................................
17
Because the Trust arranged for a third party to
make payments to Guaranty Life, the creation of
the Policy lacked a good faith insurable interest. ..
18
Mr. Hicks had no risk of actual future loss
because the face value on the Policy far exceeded
his net worth. ...........................................................
19
Even if this Court Determines There Was a Valid Insurable
Interest, the Policy Is Still Void Due to Its Fraudulent
Misrepresentations........................................................................
21
b.
c.
d.
B.
Page
1.
2.
3.
4.
The Trust made false statements in the Application and
SOCI form. ..........................................................................
22
The Trust’s misrepresentations were material to the
issuance of the Policy. ........................................................
24
The Trust knew that the representations in the
Application and the SOCI form were false........................
25
The statements in the Application and SOCI form by the
Trust intended to deceive Guaranty Life. .........................
27
iii
TABLE OF CONTENTS (CONT.)
II.
AS A MATTER OF LAW AND PUBLIC POLICY, GUARANTY LIFE
SHOULD BE ABLE TO RETAIN THE PREMIUMS BECAUSE THE
CONTRACT WAS ILLEGAL AND PROCURED AS A RESULT OF
FRAUD. ....................................................................................................
A.
Because the Policy Violated New Tejas Statutory Law and
Is Illegal, this Court Should Leave the Parties as It Found
Them. .............................................................................................
1.
30
31
Allowing Guaranty Life to retain the premiums deters
investors from engaging in illegal life-wagering
contracts. .............................................................................
32
Because the parties here are not in pari delicto,
Guaranty Life should not bear the responsibility for
the Investors’ statutory violations. ....................................
35
If this Court Finds That the Policy Was Procured as a Result
of Fraud or Misrepresentation, this Court Should Apply an
Exception to the General Rule of Rescission. ..............................
37
3.
1.
Following other courts, this Court should allow
Guaranty Life to retain the premiums because the
Policy was procured as a result of fraud. ..........................
38
Applying an exception for fraud in this case deters
investors from creating STOLI schemes and wagering
on human lives. ...................................................................
39
Public Policy Demands That Guaranty Life Be Able To Keep
the Premiums Because It Acted Diligently in Investigating
the Contract and Because Other Remedies Are Inadequate. .....
40
2.
C.
29
Forcing Guaranty Life to return the premiums would
require the Investors to prove that they acted illegally. ..
2.
B.
Page
iv
TABLE OF CONTENTS (CONT.)
1.
Page
Allowing Guaranty Life to retain the premiums will not
create an incentive for other insurers to delay
investigating suspicious STOLI schemes or initiating
litigation. .............................................................................
41
Other remedies available to Guaranty Life are
inadequate to compensate it for its financial loss.............
43
CONCLUSION ....................................................................................................
44
APPENDIX A ......................................................................................................
A-1
APPENDIX B ......................................................................................................
B-1
APPENDIX C ......................................................................................................
C-1
2.
v
TABLE OF AUTHORITIES
CASES
Page(s)
SUPREME COURT OF THE UNITED STATES
Aetna Life Ins. Co. v. France,
94 U.S. 561 (1876) ............................................................................
12
Bateman Eichler, Hill, Richards, Inc. v. Berner,
472 U.S. 299 (1985) ..........................................................................
35
Celotex Corp. v. Catrette,
477 U.S. 317 (1986) .........................................................................
1
Conn. Mut. Life Ins. Co. v. Schaefer,
94 U.S. 457 (1876) ........................................................................... 9, 11, 14, 17
Grigsby v. Russell,
222 U.S. 149 (1911) ..........................................................................
9, 12
UNITED STATES COURTS OF APPEALS
Finnie v. Walker,
257 F. 698 (2d. Cir. 1919) ................................................................
11, 15
Packard v. OCA, Inc.,
624 F.3d 726 (5th Cir. 2010) ............................................................
30, 35
PHL Variable Ins. Co. v. Lucille Morello Irrevocable Trust ex rel. BNC
Nat’l Bank,
645 F.3d (8th Cir. 2011) ...................................................................
38, 39
Provident Life & Accident Ins. Co. v. Sharpless,
364 F.3d 634 (5th Cir. 2004) ............................................................
passim
Ray v. United States,
121 F.2d 416 (7th Cir. 1941) ............................................................
37
UNITED STATES DISTRICT COURTS
AXA Equitable Life Ins. Co. v. Infinity Fin. Group, LLC.,
608 F. Supp. 2d 1349 (S.D. Fla. Sept. 9, 2011) ............................. 12, 13, 15, 18
vi
TABLE OF AUTHORITIES (CONT.)
Lincoln Nat’l Life Ins. Co. v. Calhoun,
596 F. Supp. 2d 882 (D. N.J. 2009) .................................................
Page(s)
10, 19
Lincoln Nat’l Life Ins. Co. v. Snyder,
722 F. Supp. 2d 546 (D. Del. 2010) ..................................................
passim
Principal Life Ins. Co. v. Lawrence Rucker 2007 Ins. Trust,
774 F. Supp. 2d 674 (D. Del. 2010) ..................................................
39
Pruco Life Ins. Co. v. Brasner,
No. 10-80804, 2011 U.S. Dist. LEXIS 156297
(S.D. Fla. Nov. 14, 2011) .................................................................. 16, 17, 19, 20
Sun Life Assur. Co. of Canada v. Berck,
719 F. Supp. 2d 410 (D. Del. 2010) ..................................................
41, 42, 43
Tracy v. USAA Casualty Ins. Co.,
No. 11-00487 LEK-KSC, 2012 WL 928186
(D. Haw. March 16, 2012) ................................................................
30
STATE COURTS
Abdallah, Inc. v. Martin,
65 N.W.2d 641 (Minn. 1954) ............................................................
37
Butterworth v. Miss. Valley Trust Co.,
240 S.W.2d 676 (Mo. 1951) ..............................................................
12
Carmichael v. Nationwide Life Ins. Co.,
810 S.W.2d 39 (Ark. 1991) ...............................................................
25
Chamberlain v. Butler,
86 N.W.481 (Neb. 1901) ...................................................................
12
Graphic Arts Mut. Ins. Co. v. Pritchett,
469 S.E.2d 199 (Ga. Ct. App. 1995) .................................................
25, 27
Harris v. Gonzalez,
789 So.2d 405 (Fla. 4th Dist. Ct. App. 2001) ..................................
33
vii
TABLE OF AUTHORITIES (CONT.)
Hohenschultz v. Knights of Columbus,
186 S.W.2d 177 (Ark. 1945) .............................................................
Page(s)
37
Home Mut. Benefit Ass’n v. Keller,
230 S.W. 10 (Ark. 1921) ..................................................................
31
Lakin v. Postal Life & Casualty Ins. Co.,
316 S.W.2d 542 (Mo. 1958) .............................................................
15
Lewis v. Davis,
199 S.W.2d 146 (Tex. 1947) .............................................................
35
Martin v. Hodge,
1 S.W. 694 (Ark. 1886) .....................................................................
32
Nat’l Life & Accident Ins. Co. v. Alexander,
147 So. 173 (Ala. 1933) ....................................................................
31
Sec. Mut. Life Ins. Co. v. Little,
178 S.W. 418 (Ark. 1915) .................................................................
31, 32
Steinbeck v. Diepenbrock,
52 N.E. 662 (N.Y. 1899) ...................................................................
12, 13
Taylor v. Grand Lodge A.O.U.W. of Minn.,
105 N.W. 408 (Minn. 1905) ..............................................................
38
TTSI Irrevocable Trust v. Relia-Star Life Ins. Co.,
60 So.3d 1148 (Fla. 5th Dist. Ct. App. 2011) ..................................
32, 33, 34
Wages v. Wages,
42 S.E.2d 481 (Ga. 1947)..................................................................
12
FEDERAL STATUTES
28 U.S.C. § 1332(a)(1) (2006) ......................................................................
7
Fed. R. Civ. P. 56(a) ....................................................................................
2
viii
TABLE OF AUTHORITIES (CONT.)
NEW TEJAS STATUTES
Page(s)
N. Tej. § 1407 ..............................................................................................
passim
N. Tej. § 1408 ..............................................................................................
passim
N. Tej. § 1409, amended by N. Tej. § 1409(d)-(g) ......................................
passim
OTHER SOURCES
1 Williston on Contracts § 3:3 (4th ed. 2012) ............................................
30
17A Am. Jur. 2d Contracts § 299 (2012) ....................................................
30
26 Williston on Contracts § 68:2 (4th ed. 2010) .......................................
37
30 A.L.R. 2d 1310 §§ 32-34 .........................................................................
15, 17
Black’s Law Dictionary 350 (9th ed. 2009) ................................................
9
Eryn Mathews, STOLI on the Rocks: Why States Should Eliminate
the Abusive Practice of Stranger-Owned Life Insurance, 14
Conn. Ins. L.J. 521 (2008) ................................................................
40, 44
Insurance Companies Held Negligent In Issuing Policies To Applicant
Without Insurable Interest and Consequently Held Liable for
Wrongful Death of Insured Child Murderer by Policyholder, 58
Colum. L. Rev. 1087 (1958) ..............................................................
31
Jacob Loshin, Note, Insurance Law’s Hapless Busybody: A Case
Against the Insurable Interest Requirement, 117 Yale L.J. 474
(2007) ................................................................................................
19
Letter from Jennifer W. Floyd, Clerk for the United States Court of
Appeals Fourteenth Circuit (October 8, 2012)................................
8, 11
Maria Fleisher, Stranger Originated Life Insurance: Finding a Modern
Cure for an Age-Old Problem, 41 Cumb. L. Rev. 569 (2011) .........
10
Robert S. Bloink, Catalysts for Clarifications: Modern Twists on the
Insurable Interest Requirement for Life Insurance, 17 Conn.
L.J. 55 (2010) ....................................................................................
9
ix
No. 2012-cv-2073
IN THE
UNITED STATES COURT OF APPEALS
FOR THE FOURTEENTH CIRCUIT
__________________________
OCTOBER TERM 2012
__________________________
Frank Kipp, As Trustee for the Hicks Irrevocable Life Insurance Trust, and
Presidential Holdings, LLC.,
Appellant,
v.
Guaranty Life Insurance Company,
Appellee.
ON APPEAL FROM THE JUDGMENT OF THE UNITED STATES DISTRICT
COURT FOR THE DISTRICT OF NEW TEJAS
BRIEF FOR APPELLEE
OPINION BELOW
The opinion of the United States District Court for the District of New Tejas
is unreported and set forth in the Record. (R. 1-15.)
STANDARD OF REVIEW
The standard of review of a lower court’s grant or denial of summary
judgment is de novo. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). A grant
1
of summary judgment should be affirmed “if the movant shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment as a
matter of law.” Fed. R. Civ. P. 56(a).
STATUTORY PROVISIONS
This case concerns sections of New Tejas’s insurable interest laws addressing
incontestability (N. Tej. § 1407), rescission (N. Tej. § 1408), and insurable interest
(N. Tej. § 1409), which is reproduced in Appendix A. This case also considers the
2009 amendment to section 1409 that explicitly addresses life-wagering contracts
that create an illusion of a legitimate insurable interest (N. Tej. § 1409(d)-(g)), and
is reproduced in Appendix B.
STATEMENT OF THE CASE
Statement of the Facts
On January 4, 2007, life insurance agent Reggie Hightower (“Mr.
Hightower”) contacted and met with Sydney Hicks (“Sydney”) to discuss estate
planning for Sydney’s seventy-two year old father, Don Juan W. Hicks (“Mr. Hicks”).
(R. 10.) Mr. Hicks, a retired cab driver, lives on social security, resides in low-rent
apartments, and his only significant asset is a 401K plan worth $19,000. (R. 11.)
Sydney, an engineer, makes $60,000 per year and lives in a modest $150,000 house.
(R. 11.) Sydney testified that during their meeting Mr. Hightower seemed
indifferent to the fact that Mr. Hicks had no discernible estate that needed planning.
(R. 10.) The meeting culminated with Sydney agreeing to discuss with his father
Mr. Hightower’s proposed life insurance plan. (R. 10.)
2
That same day, Mr. Hightower sent the following materials to Sydney: (1) a
life insurance policy application (“Application”) from Guaranty Life Insurance
Company (“Guaranty Life”); and (2) a Statement of Client Intent (“SOCI”) form. (R.
10.)
On January 10, 2007, Mr. Hicks agreed to purchase a $500,000 life insurance
policy if Sydney agreed to pay the premiums. (R. 10.) The following day, Sydney
confirmed in an email to Mr. Hicks that he would cover all of the premiums for his
father’s life insurance policy. (R. 10.) Sydney then emailed the executed
Application and the SOCI form to Mr. Hightower. (R. 10.) On that same day, Mr.
Hightower sent an email to a Vice President at Presidential Holdings, LLC.
(“Presidential”), which stated: “Talked to Sydney Hicks, and we should be able to
flip his old man’s policy for 3% of the face value of the policy. Confirmed $20 million
for the face value.” (R. 10.)
On February 5, 2007, the Hicks Irrevocable Life Insurance Trust (“Trust”)
was created, naming Mr. Hicks as the grantor, Sydney as the sole beneficiary, and
attorney Bryan Jones (“Mr. Jones”) as the Trustee. (R. 7.) On February 6, 2007,
the Trust, via Mr. Hightower, applied to Guaranty Life for a life insurance policy
with a face value of $20 million on Mr. Hicks’s life. (R. 7.) The Application
misrepresented Mr. Hicks as a self-employed entrepreneur with a net worth of $1.2
billion and an annual earned income of $8.5 million. (R. 7.) It also inaccurately
stated that he resided in an oceanfront property on Jupiter Island, New Tejas. (R.
7.)
3
The SOCI declared that any insurance premiums for a policy would not “be
borrowed by the proposed owner or proposed insured or by any other individual,
trust, partnership, corporation or similar or related entity, including by a policy
beneficiary or trust beneficiary.” (R. 22.) Moreover, the SOCI form stated that
“[a]ny misstatement or concealment will be treated as a material misrepresentation
for which Guaranty Life may seek any and all sanctions available to it.” (R. 22.)
The SOCI form also declared that the owner of the policy did not “have any
understanding or agreement providing for a party, other than the owner, to obtain
any legal or equitable right, title of Interest In [sic] the policy or entity owning the
policy.” (R. 23.) The undersigned parties to the SOCI, Mr. Hicks and Mr. Jones,
both declared that the information in the document was “true, correct, and
complete.” (R. 22-23.) The SOCI also stated that a trust would not being
established to “facilitate the eventual sale or transfer of the policy to Investors.” (R.
23.) Guaranty Life stated that it would be “relying on the information contained in”
the SOCI and that “it would limit its review to” the terms of the agreement. (R. 23.)
On February 8, 2007—after Mr. Hicks’s medical exam and based entirely on
the information provided in the Application—Guaranty Life offered to the Trust a
life insurance policy (“Policy”) with a face value of $20 million. (R. 7-8.) The Policy
set its first year premium at $955,827 and provided for an issue date of February 16,
2007. (R. 7-8.) It stated that the Trust was the owner and sole beneficiary of the
Policy. (R. 8.) At the time, the Trust had no other assets other than the Policy. (R.
7 n.2.) Mr. Hicks testified that he had no idea that the Trust had been created
4
naming him as grantor, that the Policy’s face value was $500,000, and that Sydney
had transferred the beneficial interest in the Policy. (R. 10.)
On March 5, 2007, Guaranty Life delivered the Policy and a Policy
Acceptance Form (“PAF”) to the Trust. (R. 8, 25.) Upon doing so, Guaranty Life
received its first three-month premium payment of $238,956.75 from Sydney. (R.
8.) That same day, Mr. Hightower returned to Guaranty Life a fully executed PAF,
which stated that the insured “declares that the statements made in the application
remain full, complete, and true as of this date . . . .” (R. 8, 25.)
On March 7, 2007, unbeknownst to Guaranty Life, Sydney executed a
Beneficial Interest Transfer Agreement (“BITA”), which effectively transferred his
entire beneficial interest in the Policy to Presidential. (R. 8.) The BITA stated that
Presidential did not solicit Sydney; however, Sydney testified that he did not
remember whether Mr. Hightower sent him the BITA before or after the policy took
effect. (R. 8 n.7.) On the same day, as consideration for executing the BITA,
Presidential paid Sydney a lump sum of $838,956.75, equal to Sydney’s first threemonth premium payment to Guaranty Life plus 3% of the face value of the Policy.
(R. 9.) Presidential funded all of the premiums paid by the Trust for the Policy. (R.
13.) Also on that same day, Mr. Jones resigned as Trustee and appointed Frank
Kipp (“Kipp”) as his successor. (R. 9.)
Over a year and a half later, on October 21, 2008, Presidential finally
submitted a Designation of Owner and Designation of Beneficiary form to Guaranty
Life notifying it that the original Trust beneficiary, Sydney, had previously sold all
5
beneficial interest in the Policy to Presidential. (R. 9.) Effectively, these forms
sought to also transfer the ownership of the Policy from the Trust to Presidential.
(R. 9.) On November 19, 2008, Guaranty Life notified the Trust that it had received
the letter, but that it needed to evaluate the transfer to the extent that it may raise
questions related to the issuance of the Policy. (R. 9, 36.) On December 8, 2008,
Kipp wrote a letter in response to Guaranty Life that it maintained a contractual
right to the ownership of the Policy. (R. 9, 38.) Kipp’s letter stated that the Trust
would seek to recover damages for Guaranty Life’s material breach of its
contractual obligations if it did not accept the transfer. (R. 38.)
On December 22, 2008, Guaranty Life responded to Kipp’s letter, stating that
it issued the Policy based on representations made during the application process
and that it wanted to ensure these representations were accurate. (R. 40.)
Guaranty Life further requested that Presidential provide a list of various
documents to substantiate those representations within fourteen days, or it would
consider legal options. (R. 40-41.) Guaranty Life’s correspondence also noted that
the Policy had an effective date of February 16, 2007. (R. 40.) Section 21 of the
Policy provides that the Policy is contestable for the first two years from its issue
date. (R. 20.) During that time, the Policy states, Guaranty Life “may either
rescind the insurance or deny a claim on the basis of . . . [a] misstatement in the
application or supplemental application for this policy or any face amount increase.”
(R. 20.) Since litigation began, Mr. Hightower passed away leaving behind an
6
estate with no assets, despite the fact that he had received over $1.4 million in
commissions from Guaranty Life on the contract. (R. 8.)
Procedural History
On January 5, 2009, Kipp and Presidential (collectively “Investors”) filed this
lawsuit in the United States District Court for the District of New Tejas against
Guaranty Life. (R. 13.) The district court had jurisdiction over all the parties
because the amount in controversy exceeds $75,000 and because the parties are
citizens of different states.1 (R. 1-2.); 28 U.S.C. § 1332(a)(1). The Investors brought
claims against Guaranty Life for breach of contract, conversion, breach of the
covenant of good faith and fair dealing, intentional interference with contract and
prospective economic advantage and fraud. (R. 13.) The Investors sought damages
totaling $4.7 million, which had been paid in Policy premiums to Guaranty Life, and
an additional $600,000 of which had been paid to Sydney in exchange for his
execution of the BITA. (R. 13.) On June 6, 2009, Guaranty Life filed its
Counterclaim, seeking a declaration that the Policy is void for lack of insurable
interest and to retain the premiums paid under the Policy. (R. 13.)
On May 12, 2011, both the Investors and Guaranty Life filed separate
Motions for Summary Judgment. (R. 13.) On December 14, 2011, the district court
granted Guaranty Life’s Motion for Summary Judgment and declared the policy
void ab initio. (R. 14.) The court found that the “policy failed for a lack of insurable
interest at its inception due to the pre-arranged deal of the investor to procure
Kipp is a resident of New Tejas and trustee of the Trust with a situs in New Tejas; Presidential is a
resident of New York and Connecticut; and, Guaranty Life is a resident of Texas. (R. 1-2.)
1
7
ownership and beneficial interest in the Policy.” (R. 14.) Due to this finding, the
district court denied the Investors’ Motion for Summary Judgment on their claims
for breach of contract and monetary damages resulting from the loss of the Policy
value. (R. 14.) The district court, however, denied Guaranty Life’s Motion for
Summary Judgment to the extent that it sought to retain the Policy premiums. (R.
15.)
On October 8, 2012, this Court granted review set forth in the memo issued
by the Office of the Clerk of this Court. Letter from Jennifer W. Floyd, Clerk for the
United States Court of Appeals Fourteenth Circuit (October 8, 2012) [hereinafter
Clerk’s Letter].
SUMMARY OF ARGUMENT
This Court should affirm the decision of the New Tejas district court and hold
the Policy void ab initio. To prevent STOLI schemes, this Court should read a good
faith requirement into New Tejas’s insurable interest laws. Reading a good faith
requirement into insurable interest laws is consistent with other courts’
interpretations of similar laws and better effectuates New Tejas’s legislative intent.
Because the Policy here was created with the intent to benefit Presidential, a party
without an insurable interest, the Policy should be void ab initio for lack of a good
faith insurable interest. Additionally, the Policy is void because it was procured
through fraud.
This Court should reverse the decision of the New Tejas district court and
allow Guaranty Life to retain premiums paid on the Policy. Under contract law,
8
this Court should leave the parties where it found them because the Policy was
illegal and against public policy. Guaranty Life should also be able to retain the
premiums because the Policy was procured through fraud. As other courts have
held, an exception to the general rule of rescission is appropriate to deter the
fraudulent behavior. Finally, Guaranty Life should also be able to retain the
premiums because it acted diligently in investigating the transfer of the Policy to
Presidential, and other remedies are inadequate.
ARGUMENT
I.
THE POLICY IS VOID AB INITIO BECAUSE IT LACKED AN INSURABLE
INTEREST AT ITS INCEPTION AND BECAUSE IT WAS PROCURED
THROUGH FRAUD.
Because life insurance is one of the most commonly recognized forms of
investment, states tend to give life insurance policies ordinary characteristics of
property. See Robert S. Bloink, Catalysts for Clarification: Modern Twists on the
Insurable Interest Requirement for Life Insurance, 17 Conn. Ins. L.J. 55, 73-75
(2010); see also Grigsby v. Russell, 222 U.S. 149, 155 (1911). Specifically, state laws
commonly include the right of a policy owner to sell his or her policy to a third party
without restriction. Grigsby, 222 U.S. at 155.
However, the right of an insured to sell his or her policy is limited if such a
sale amounts to a wager policy. See Conn. Mut. Life Ins. Co. v. Schaefer, 94 U.S.
457, 460 (1876). A “wager policy” is one that is “issued to a person who is shown to
have no insurable interest in the person or property covered by the
policy . . . .” Black’s Law Dictionary 350 (9th ed. 2009). Because wager policies
9
engender insurance schemes that devalue human life by anticipating the premature
death of another, they are against public policy and illegal in most states. See
Maria Fleisher, Stranger Originated Life Insurance: Finding a Modern Cure for an
Age-Old Problem, 41 Cumb. L. Rev. 569, 572 (2011).
Today, wager policies have taken the form of Stranger Originated Life
Insurance (“STOLI”) policies. In a typical STOLI transaction, an investor will seek
out an elderly person (or relative thereof) and offer to provide him or her with a life
insurance policy at no cost. Lincoln Nat’l Life Ins. Co. v. Calhoun, 596 F. Supp. 2d
882, 885 (D. N.J. 2009). In exchange for the investor paying the policy premiums
and for giving the insured party a lump sum of money at the time of transfer, the
elderly person agrees to assign his or her right to recover death benefits to the
investor. Fleisher, supra, at 572. This scheme creates the illusion of an insurable
interest on the life of the insured. Calhoun, 596 F. Supp. 2d at 885. In reality, a
third party, who lacks an insurable interest, has compelled the transaction in an
attempt to wager on the life of the insured. Id. STOLI transactions are therefore
tantamount to wager policies, which do nothing more than gamble on the lives of
others.
A.
Because the Policy Was Procured as Part of a STOLI Scheme, It
Lacked an Insurable Interest, Thus Making It Void Ab Initio.
New Tejas’s insurable interest laws seek to prevent the formation of STOLI
transactions. See N. Tej. §§ 1407-1409, amended by N. Tej. § 1409(d)-(g) (2009).
Section 1409(a) defines an insurable interest as “a reasonable expectation of
pecuniary advantage through the continued life, health, or bodily safety of another
10
person and consequent loss by reason of that person’s death . . . or a substantial
interest engendered by love and affection in the case of individuals closely related
by blood or law.” N. Tej. § 1409(a). Section 1409(c) provides that “[a]n insurable
interest shall be required to exist at the time the contract of life or
disability insurance becomes effective . . . .” N. Tej. § 1409(c). Section 1407
establishes a contestability period of “two years from [a policy’s] issue date.” N. Tej.
§ 1407.
Here, as an initial matter, the parties do not dispute Guaranty Life’s ability
to contest the validity of the Policy; section 1407 is not at issue. Clerk’s Letter.
Under section 1409, Sydney, the sole beneficiary of the Trust, has an insurable
interest in the life of his father, Mr. Hicks. However, because Sydney was merely
serving as a placeholder for Presidential at the time an insurable interest was
alleged to exist, the transaction amounted to an illegal STOLI scam.
1.
To accomplish New Tejas’s legislative goal to prevent cloaked
wagering policies, a good faith standard should be read into its
insurable interest laws. Good faith requires that parties to a life insurance contract have an intent to
remain the beneficiaries of the policy at the time of issuance. Finnie v. Walker, 257
F. 698, 700 (2d. Cir. 1919). If an individual transfers a life insurance policy in bad
faith, it may indicate that the contract was procured as a result of an illegal STOLI
transaction. Schaefer, 94 U.S. at 460. Therefore, to efficiently root out STOLI
schemes, a court should require a good faith insurable interest on the part of the
insured for life insurance contracts.
11
a.
Other courts have consistently read a good faith
requirement into insurable interest statutes to prevent
STOLI transactions disguised as legitimate life insurance
policies.
The Supreme Court has consistently read a good faith insurable interest, on
the part of the beneficiary, at the time a life insurance policy is issued. Grigsby, 222
U.S. at 155. An insured lacks a good faith insurable interest if he or she intends to
transfer the policy to another at the policy’s inception. Id. at 156. Conversely, a
good faith insurable interest exists at the policy’s inception if it is subsequently
assigned, “provided it be not done by way of cover for a wager policy.” Aetna Life
Ins. Co. v. France, 94 U.S. 561, 564 (1876). State courts have also followed suit in
requiring good faith. See, e.g., Butterworth v. Miss. Valley Trust Co., 240 S.W.2d
676, 682 (Mo. 1951) (emphasizing that policies assigned under speculative purposes
would lack good faith and therefore be invalid); Wages v. Wages, 42 S.E.2d 481,
487-88 (Ga. 1947) (holding that an assignment of an insurance policy is valid if done
in good faith); Chamberlain v. Butler, 86 N.W. 481, 483 (Neb. 1901) (emphasizing
that “the intention and good faith of the parties are the governing principles” when
determining the validity of an assignment); Steinbeck v. Diepenbrock, 52 N.E. 662,
663 (N.Y. 1899) (highlighting that “the value of the interest [an individual has in
his or her life] has [a] relation to the question whether the policy is taken out in
good faith, and not as a gambling transaction”).
As states have adopted insurable interest laws, courts have interpreted an
implicit good faith requirement. See, e.g., AXA Equitable Life Ins. Co. v. Infinity
Fin. Group, LLC., 608 F. Supp. 2d 1349, 1356 (S.D. Fla. Sept. 9, 2011). In AXA
12
Equitable Life, for example, the court expounded on what constitutes an “insurable
interest” within the context of Florida’s life insurance laws. 608 F. Supp. 2d at 1356.
Similar to the language of New Tejas section 1409(c), the Florida statute at issue
stated that “[t]he insurable interest need not exist after the inception date of
coverage under the contract.” Id. Interpreting the statute, the court concluded that
“sham assignments made simply to circumvent the law’s prohibition on wagering
contracts” could be prevented through a requirement of good faith. Id. (internal
citations and quotations omitted).
To give effect to New Tejas’s insurable interest laws, and in line with the
decisions of other states, section 1409(c) should be interpreted as having a good
faith element implicit in its insurable interest requirements. Without requiring
good faith, “the insured, instead of taking out a policy payable to a person having no
insurable interest in his life, can take it out to himself and at once assign it to such
person.” Steinbeck, 158 N.Y. at 664. Because a beneficial interest in a policy can be
transferred instantaneously, to require anything less than good faith would render
New Tejas’s laws easily circumvented and essentially ineffective.
b.
By amending section 1409, the New Tejas Legislature has
expressed its intent to require a good faith insurable
interest.
In 2009, the New Tejas Legislature amended section 1409, which clarified its
prior statute in two important ways. First, under section 1409(d), insurable
interest laws are violated when trusts and special purpose entities, without an
insurable interest in the life of the insured, are used to secure life insurance policies.
13
N. Tej. § 1409(d). Second, section 1409(e) provides that any device or scheme that is
“designed to give the appearance of an insurable interest where there is no
legitimate insurable interest violates the insurable interest laws.” N. Tej. § 1409(e)
(emphasis added). These amendments do not apply retroactively, and are effective
only to policies issued after August 28, 2009. N. Tej. § 1409(g).
Because the Policy here had an effective date prior to 2009, the amendments
do not apply, but are nonetheless instructive of the larger legislative purpose. The
legislature’s intent to prevent STOLI schemes is explicit in its amended language;
that is, the legislature added the terms “scheme,” “wagering on life,” and “legitimate
insurable interest” to directly address STOLI contracts. N. Tej. § 1409(d)-(e).
Therefore, a good faith requirement better effectuates the legislature’s intent to
curb STOLI transactions. See Schaefer, 94 U.S. at 462 (stressing that requiring the
existence of a proper insurable interest and good faith would prevent the creation of
wagering contracts).
Because other courts have read a good faith requirement into similar statutes
and because it aligns with New Tejas’s legislative intent, this Court should apply a
good faith analysis to the creation and transfer of the Policy.
2.
The assignment of the Policy to Presidential demonstrates a
lack of good faith in the creation of the Policy, thus making it
void ab initio.
New Tejas permits individuals to assign life insurance policies to third
parties, “regardless of whether the beneficiary designated has an insurable interest.”
N. Tej. § 1409(b). Additionally, an insurable interest does not need to exist at the
14
time of the insured’s death. N. Tej. § 1409(c). Despite a beneficiary’s right to freely
transfer his or her interest in a policy, beneficiaries need to first establish that an
insurable interest existed at the policy’s inception. Id. If this Court adopts a good
faith requirement, as other courts have persuasively done, analyzing the
circumstances under which a policy is subsequently transferred is central to
determining whether a good faith insurable interest existed at the time of the
policy’s creation. AXA Equitable Life, 608 F. Supp. 2d at 1356. To determine
whether an insurance policy was assigned in good faith, courts have considered a
number of factors, including, but not limited to, the following: pre-existing
arrangements, timing, payment of the premiums, and risk for actual loss. 30 A.L.R.
2d 1310 §§ 32-34. In considering these factors, the Policy’s assignment to
Presidential demonstrates that the Policy lacked a good faith insurable interest at
its inception.
a.
The Trust and Presidential had a pre-existing agreement
to assign the Policy before its creation.
In determining the existence of bad faith, courts have considered whether an
assignment of a life insurance policy was made pursuant to a preconceived
agreement. See, e.g., AXA Equitable Life, 608 F. Supp. 2d at 1357; Lakin v. Postal
Life & Casualty Ins. Co., 316 S.W.2d 542, 552 (Mo. 1958). Pre-conceived plans to
evade insurable interest requirements render the policies void ab initio. See, e.g.,
Finnie, 257 F. at 700 (holding “[c]ontemporaneous assignments of life insurance
policies are wagering contracts, and should be treated as such, just as the policies
15
are where the beneficiary has no insurable interest”); Pruco Life Ins. Co. v. Brasner,
No. 10-80804, 2011 U.S. Dist. LEXIS 156297, at *23 (S.D. Fla. Nov. 14, 2011).
In Brasner, an insurance broker approached the insured and arranged for her
to take out a $10 million life insurance policy and to establish a trust. Brasner,
2011 U.S. Dist. LEXIS 156297, at *3. Testimony revealed that the insured had
plans before the issuance of the policy to sell her ownership to a group of investors
in a secondary market. Id. at *27. The court held that the existence of a preexisting understanding was sufficient to show that the policy was not procured in
good faith and therefore was invalid for a lack of a good faith insurable interest. Id.
Here, like in Brasner, the Policy was predicated on the pre-existing
arrangement to transfer the beneficial interest in the Policy to the Investors. On
January 4, 2007, Mr. Hightower met with Sydney to discuss the virtues of a life
insurance policy on Mr. Hicks’s life. (R. 10.) Only one week later and just one
month before the Policy was issued, Mr. Hightower emailed a Vice President of
Presidential, stating that they “should be able to flip [Mr. Hicks’s] policy for 3% of
the face value of the [P]olicy.” (R. 10.) Additionally, Sydney admitted that he would
not have been able to afford the initial premium payment without the help of Mr.
Hightower. (R. 11.) Moreover, a third party wired the first three-month premium
payment and 3% of the Policy’s face value to Sydney only two days after he made
his initial payment to Guaranty Life. (R. 11-12.) The meeting, the email, and the
wiring of funds, taken together, establish a pre-existing arrangement tantamount to
a STOLI scheme. Therefore, consistent with other courts rulings regarding pre-
16
arranged deals, the assignment of the Policy voided any possible insurable interest
that may have been alleged to exist at the Policy’s inception.
b.
The swiftness of the assignment to Presidential makes it
unlikely that was the Policy was procured in good faith.
The length of time that elapses between the procurement of an insurance
policy and its subsequent assignment “stands in direct proportion to the likelihood
of the assignment being upheld as valid.” 30 A.L.R. 2d 1310 § 33. Accordingly, if a
policy is assigned shortly after it takes effect, a court is more likely to find bad faith
in the agreement from which “intent to evade the rule [against wagering contracts]
might be inferred.” Schaefer, 94 U.S. at 461. For example, in Brasner, the court
found that a one-month time elapse between the policy’s issuance and its
subsequent assignment was sufficient to establish a finding of a bad faith insurable
interest. 2011 U.S. Dist. LEXIS 156297, at *12, *31. This short amount of time
indicated, according to that court, that the policyholder’s decision to transfer the
policy occurred before the life insurance policy was issued. Id. at *31.
Here, the short time elapse between the Policy’s issuance and its later
assignment to the Investors lends strongly against a finding of good faith. The
Policy was transferred within a measly nineteen days after its issuance. (R. 8.) The
short time during which Sydney held the Policy demonstrates the existence of an
illegal STOLI scheme. The Investors’ intent to evade the rule against wagering
policies can be inferred, thus making the Policy lack a good faith insurable interest.
17
c.
Because the Trust arranged for a third party to make
payments to Guaranty Life, the creation of the Policy
lacked a good faith insurable interest.
To determine whether an assignment is procured in good faith, courts
consider whether the assignee of the life insurance policy paid the premiums. See
AXA Equitable Life, 608 F. Supp. 2d at 1357. Courts are also cognizant of the
financial ability of the insured party to pay premiums. Id. Courts infer bad faith in
the procurement of a policy if an insured can only make payments through third
party contributions. Id. Payments made by third parties give rise to an inference of
bad faith because it demonstrates that the insured never intended to keep the policy.
Id. This is especially true when some or all of the premiums are originally paid by a
subsequent assignee of a transferred policy. Id.
In AXA Equitable Life, the defendants engaged in a scheme to recruit elderly
applicants for life insurance policies. Id. at 1352. Pursuant to a typical STOLI
scheme, the policies were eventually transferred to third parties, who had initially
paid the premiums. Id. at 1352-53. An important factor in the court’s decision to
deny the defendants’ Motion to Dismiss was the fact that an outside party had paid
the premiums, and therefore “[t]he insured never planned to maintain the policies
themselves.” Id. at 1357. This demonstrated that, “the policies were procured only
as part of a plan established from the outset, under which third parties were to pay
the premiums for the policies . . . .” Id.
Here, like in AXA Equitable Life, this Court should infer bad faith because a
third party paid all of the Policy’s premiums. Presidential funded all premium
18
payments made by the Trust under the Policy, rather than Sydney. (R. 13.) Sydney
testified that he had no intention to pay premiums on the Policy without
reimbursement from an outside party. (R. 12.) Moreover, Sydney did not have the
means to pay the nearly $1 million annual premium payments on the Policy: he
made a modest annual salary of $60,000, lived in a $150,000 house, and his only
other “significant asset” was a 401K plan valued at $19,000. (R. 11.)
The fact that an outside party paid the Policy’s premiums, which far exceeded
Sydney’s means, establishes that Sydney never planned to remain the beneficiary of
the Policy himself. Instead, the Policy was procured for the sole purpose of
immediately assigning its beneficial interest to Presidential. This collusion
constitutes an illegal STOLI scheme and consequently the Policy lacked a good faith
insurable interest at its inception.
d.
Mr. Hicks had no risk of actual future loss because the
face value on the Policy far exceeded his net worth.
Finally, courts have indicated that a bad faith insurable interest is likely
present when the insured has no risk of actual future loss. Brasner, 2011 U.S. Dist.
LEXIS 156297, at *32; Calhoun, 596 F. Supp. 2d at 889. By requiring an insurable
interest at a policy’s inception, courts can differentiate between contracts that seek
to dampen “risk of actual future loss” and those that seek “to speculate whether
some future contingency would occur.” Jacob Loshin, Note, Insurance Law’s
Hapless Busybody: A Case Against the Insurable Interest Requirement, 117 Yale
L.J. 474, 480 (2007).
19
In Brasner, the policy was significantly disproportionate to the insured’s
actual worth. 2011 U.S. Dist. LEXIS 156297, at *32. The insured’s net worth was
less than $1 million dollars, whereas the face value on the procured policy was $10
million. Id. Because the policy’s beneficial interest far exceeded the insured’s
actual risk of future loss, the policy there was declared void ab initio. Id.
Here, like in Brasner, the face value on the Policy far exceeds Mr. Hicks’s
actual risk of loss. Mr. Hicks did not have an actual risk of future loss that would
necessitate a $20 million life insurance policy; he is a seventy-two year old retiree
living off social security. (R. 11.) The disproportion between the value of the Policy
and Mr. Hicks’s actual worth indicates that bad faith was present when the Trust
secured the Policy.
As other courts have held and the New Tejas Legislature has implied,
insurance contracts procured in bad faith are void ab initio for lack of an insurable
interest. Reading a good faith requirement into New Tejas’s insurable interest laws
help roots out the modern-day form of illegal wagering policies. Here, factors that
other courts have used to establish a bad faith insurable interest are met: there
was a pre-existing arrangement between Sydney and the Investors, the Policy was
transferred promptly, Presidential paid all of the Policy’s premiums for Sydney, and
there was no actual risk of future loss for Mr. Hicks. As a result, the Policy was
nothing more than a wagering contract on the life of Mr. Hicks, thereby devaluing
his life to a mere speculative investment.
20
B.
Even if this Court Determines There Was a Valid Insurable Interest,
the Policy Is Still Void Due to Its Fraudulent Misrepresentations.
If this Court determines that the Policy lacked an insurable interest at its
inception, then no determination needs to be made regarding the misrepresentation
claim. But, if this Court chooses not to read a good faith standard into New Tejas’s
insurable interest laws, it should still void the Policy for fraud, as proscribed under
New Tejas’s rescission statute.
New Tejas’s rescission statute, section 1408, provides that “[i]f a
representation is false in a material point, whether affirmative or promissory, the
injured party is entitled to rescind the contract from the time the representation
becomes false.” N. Tej. § 1408. Additionally, under section 21 of the Policy
Guaranty Life “may either rescind the insurance or deny a claim on the basis
of . . . [a] misstatement in the application or supplemental application . . . .” (R. 20.)
Courts generally consider four elements in a fraudulent misrepresentation
claim. See, e.g., Provident Life & Accident Ins. Co. v. Sharpless, 364 F.3d 634, 641
(5th Cir. 2004). These courts have held that to establish such a claim, a party must
prove that a statement in the insurance application or supplemental application
was: (1) false, (2) material, (3) one in which the defendant knew it was false or
made recklessly without any knowledge of its truth, and (4) made with an intent to
deceive. Id.; see also Lincoln Nat’l Life Ins. Co. v. Snyder, 722 F. Supp. 2d 546, 562
(D. Del. 2010) (requiring falsity, knowledge by the defendant and an intent to
deceive to succeed on a claim of fraudulent misrepresentation).
21
1.
The Trust made false statements in the Application and SOCI
form.
STOLI transactions often lead to misrepresentations in the insurance
application to disguise the scheme as a legitimate transaction. Snyder, 722 F. Supp.
2d at 559. In Snyder, the defendant trust solicited a senior citizen to participate in
a STOLI scheme. Id. at 550-53. Several misrepresentations were made in the
application. First, the trust inflated the wealth of the insured in an effort to drive
up the policy’s face value to $18.5 million, despite the fact that both the insured and
the trust signed acknowledgements regarding the wealth of the insured. Id. at 559.
Second, an outside party paid the policy’s premiums, despite the application
disallowing third party contributions of premium payments. Id. Third, the insured
named the trust as the policy’s beneficiary to ease its eventual sale on the secondary
market, despite the application’s prohibition in the application on such sales. Id.
Based on these facts, the district court held that the insurance company sufficiently
pled facts for fraud and misrepresentation. Id. at 559-62.
Like in Snyder, the Application and SOCI form here contained several
misrepresentations. The Application overvalued Mr. Hicks’s wealth, stating on the
SOCI form that he had a net worth of $1.2 billion and an income of $8 million at the
time of the Application. (R. 7.) In reality, Mr. Hicks’s status as a retired cab driver
living off social security and in low-income housing falls far short of this declaration.
(R. 11.)
Like in Snyder, the Application also misrepresented that an outside party
would not be funding the Policy. Sydney testified that he had no intention of paying
22
the premiums and that he could not have afforded to pay them. (R. 11.) Sydney
also testified that Mr. Hightower agreed to reimburse him immediately. (R. 12.)
Discovery revealed that two days after the Policy was issued, Sydney received a
wire transfer equal to the Policy’s first three-month premium payment and 3% of
the its face value. (R. 9, 11-12.) Presidential funded the premium payments made
by the Trust for the Policy. (R. 13.)
Like in Snyder, the Policy was purchased with the intent to transfer it to a
third party. Here, the SOCI form stated that the owner of the Policy did not “have
any understanding or agreement providing for a party, other than the owner, to
obtain any legal or equitable right, title of Interest In [sic] the policy or entity
owning the policy.” (R. 23.) However, one month before the Policy was issued, Mr.
Hightower sent an email notifying Presidential that he had spoken with Sydney
and that they would be able to “flip” the $20 million Policy. (R. 10.) Moreover, the
interest in the Policy was then transferred to Presidential only nineteen days after
its issuance. (R. 8.) Taken together, these facts indicate that the Application
misrepresented the fact that an agreement to transfer the Policy existed between
Presidential and the Trust before the parties applied for the Policy.
Finally, the Application here contains additional misrepresentations
regarding the Trust, like those in Snyder. The Application explicitly banned the
establishment of a trust for the primary purpose of facilitating an eventual sale or
transfer to investors. (R. 23.) Nonetheless, the Trust was created only one day
before the Application was submitted to Guaranty Life, it had no assets other than
23
the subject Policy, and its interest was transferred only nineteen days after its
creation. (R. 7.) These facts demonstrate that the sole purpose of the Trust was to
ease the transfer of the Policy’s beneficial interest to Presidential, in violation of the
signed Application agreement. (R. 7.) Therefore, like the trust in Snyder, these
false statements are sufficient to establish facts of fraud and misrepresentation.
2.
The Trust’s misrepresentations were material to the issuance of
the Policy.
A misrepresentation is considered “material” if the falsity would have
affected the insurance company’s decision to issue the policy. Sharpless, 364 F.3d
at 641-42. In Sharpless, the defendant made false statements regarding her mental
health, including hiding the fact that she had once attempted suicide and battled
alcohol abuse for years. Id. at 641. The administrator testified that the policy
would not have been issued had the insurance company known of these conditions.
Id. at 641-42. The Fifth Circuit concluded that these misrepresentations were
material because the insurance company relied on the falsified medical history in
deciding to issue the policy. Id.
Like in Sharpless, the misrepresentations in the Application and
supplemental documentation were material. Guaranty Life stated that it would not
have issued the Policy had it known Mr. Hicks’s true financial worth or true
intention behind purchasing the Policy. (R. 40.) In its December 22, 2008 letter to
Presidential, Guaranty Life stated that the “decision to insure [Mr. Hicks] was
based on, among other things, representations made to [Guaranty Life] during the
application process.” (R. 40.) Guaranty Life’s chief underwriter also testified that
24
Guaranty Life would not have issued the Policy had it known: (1) about
misrepresentations in the Application and supplemental materials; (2) that a third
party would ultimately obtain ownership of the Policy; and (3) that “Sydney Hicks
would receive cash or other inducement in connection with the application for and
purchase of the Policy.” (R. 12.) Thus, the misrepresentations in the Application
were material insofar as they influenced Guaranty Life’s decision to issue the Policy.
3.
The Trust knew that the representations in the Application and
the SOCI form were false.
To be held accountable for fraudulent misrepresentation requires a showing
that the party knew the statements were false, or else that they were made in a
reckless manner without any knowledge of their veracity. See Sharpless, 364 F.3d
at 641. An applicant to an insurance policy cannot deny that he or she did not know
the misrepresentations were in the application because they failed to read the
application. See Carmichael v. Nationwide Life Ins. Co., 810 S.W.2d 39, 41 (Ark.
1991) (holding that applicants have knowledge of misrepresentations as long as
they had a chance to read the application before signing); see also Graphic Arts Mut.
Ins. Co. v. Pritchett, 469 S.E.2d 199, 202 (Ga. Ct. App. 1995) (emphasizing that an
insurer is allowed to rely on the truthfulness of statements made in an insurance
policy application).
In the context of STOLI schemes, applicants are knowledgeable of their false
statements when they undersign a clause in their application confirming the
veracity of the information contained therein. Snyder, 722 F. Supp. 2d at 551. In
Snyder, a provision in the application stated that the signees had read the
25
application and that all of the answers were correctly recorded and true. 722 F.
Supp. 2d at 551. The court held that, because the applicants signed the clause, they
had knowledge of the misrepresentations in the application. Id. at 562.
Additionally, courts infer a trust’s knowledge of fraudulent
misrepresentations in a life insurance application if the trust’s actions demonstrate
willingness to participate in a STOLI scheme. Id. at 561-62. In Snyder, the court
emphasized that the trust’s knowledge of the misrepresentations could be “plausibly
inferred from the alleged facts that the STOLI scheme called for the establishment
of the [t]rust, the investor-funded premiums were paid from the [t]rust, and the
[t]rust was used to purposefully conceal the true nature of the Wisner Policy.” Id.
Here, the Trust and Mr. Hicks both had knowledge of the misrepresentations
made in the Application because they had a chance to read the forms before signing.
The SOCI and PAF both contained a clause stating the undersigned and insured
declare and certify that all the information in the form was “true, correct, and
complete.” (R. 17, 25.) Although Mr. Hicks claims that he thought the Policy was
for only $500,000, just one line above Mr. Hicks’s name on the SOCI form is a
statement that the Policy is for an amount over $2 million. (R. 22.) Moreover, Mr.
Hicks testified that he had no idea a Trust had been created. (R. 11-12.) But
separating his name from the proposed owner of the Policy (namely, the Trust) on
the SOCI form is only one word, “and.” (R. 22.) The Trust, like Mr. Hicks, also
signed the lines embedded in these detailed forms. (R. 22.) Thus, Guaranty Life is
26
allowed to rely on the truthfulness of any representations made in the Application.
See Pritchett, 469 S.E.2d at 202.
Like in Snyder, this Court can also infer that the Trust had knowledge of the
fraudulent misrepresentations based on the surrounding circumstances of the
Trust’s creation. The Trust’s only purpose was to facilitate the STOLI scheme: the
Trust was established the day before the Application materials were submitted, and
Sydney’s beneficiary interest ended nineteen days after the Policy’s issuance. (R. 78.) Additionally, the Trust represented in the Application that no outside party
would fund the premium payments, yet Presidential funded premium payments
through the Trust’s name. Therefore, because the Trust’s establishment and sole
purpose was to be involved in an illegal STOLI scheme, this Court can infer that the
Trust had knowledge of the misrepresentations.
If the Trust is allowed to escape liability, then other trusts involved in the
procurement of STOLI policies will be given a safe haven and they be able to avoid
any culpability regarding misrepresentations. Because the Trust had the
opportunity to read the Application before signing and because it was established
only to facilitate the STOLI scheme, this Court should infer that the Trust had
knowledge of the misrepresentations in the Application.
4.
The statements in the Application and SOCI form by the Trust
intended to deceive Guaranty Life.
For an applicant to be liable for fraudulent misrepresentation, the applicant
must have intended to deceive the insurer by the misrepresentations. Sharpless,
364 F.3d at 641. Intent to deceive can be inferred from facts that indicate an
27
applicant knew that the misrepresentations would affect the insurer’s decision to
issue the policy. Sharpless, 364 F.3d at 641; see also Snyder, 722 F. Supp. 2d at 562.
In Sharpless, the applicant desired to induce the insurer to issue a high face value
policy, and thus misrepresented the value of her estate. 364 F.3d at 641. The Fifth
Circuit held that the applicant had intent to deceive based on the fact that the
applicant knew about the misstatements and that they affected her eligibility under
the policy. Id.
Like in Sharpless, the Trust here intended the misrepresentations in the
Application and SOCI form to deceive Guaranty Life’s underwriters. Guaranty Life
stated that it would be “relying on the information contained in” the SOCI and that
“it would limit its review to” the terms of the agreement. (R. 23.) In signing the
SOCI form, the Trust knew that the contained statements would affect Mr. Hicks’s
eligibility for the Policy. By purposely misrepresenting the value of Mr. Hicks’s
estate, the Trust knew it would be able to acquire the Policy at a value that grossly
exceeded Mr. Hicks’s actual life insurance needs. Therefore, the Trust intended to
deceive Guaranty Life because it knew the falsified statements would be used in
determining Mr. Hicks’s eligibility for the Policy.
Based on these facts, this Court should conclude that the Trust, now under
the ownership of the Investors, made fraudulent misrepresentations in the
Application and supplemental materials to acquire a policy that would be
transferred to Presidential. Guaranty Life can therefore void the rescindable Policy,
under section 21 of the Policy and New Tejas section 1408.
28
II.
AS A MATTER OF LAW AND PUBLIC POLICY, GUARANTY LIFE
SHOULD BE ABLE TO RETAIN THE PREMIUMS BECAUSE THE
CONTRACT WAS ILLEGAL AND PROCURED AS A RESULT OF FRAUD.
New Tejas’s insurable interest laws require that an insurable interest exist
at the time the policy takes effect. N. Tej. § 1409(c). However, the statutes do not
address whether an insurer must return premiums paid pursuant to a policy that
violates section 1409(c). Id. This issue is a matter of first impression. (R. 14.) This
Court should hold as a matter under contract law that Guaranty Life should be able
to retain the premiums paid under the Policy to deter investors from wagering on
the lives of senior citizens.
Additionally, New Tejas section 1408 deters STOLI schemes by providing a
remedy of rescission for life insurance contracts procured as a result of fraud.
Courts have applied an exception to rescission in which an insurer is allowed to
keep premiums paid under the policy when the insured makes fraudulent
misrepresentations. If this Court finds the policy was procured as a result of fraud,
it should apply a similar exception to prevent the continuing practice of STOLI
schemes. Adopting a contrary rule would create an invitation for investors to
gamble on the lives of human beings.
Finally, because Guaranty Life is less at fault for the violations of sections
1408 and 1409(c), allowing Guaranty Life to retain premiums paid on the Policy is
the only adequate remedy for its financial loss.
29
A.
Because the Policy Violated New Tejas Statutory Law and Is Illegal,
this Court Should Leave the Parties as It Found Them.
Contract law provides that an illegal contract, or one that is considered to be
“against public policy,” calls for the court to “leave the parties where the court found
them.” 17A Am. Jur. 2d Contracts § 299 (2012). Courts justify applying this
default rule by claiming that an illegal contract does not bestow any rights on either
party and therefore should not be recognized in court. Packard v. OCA, Inc., 624
F.3d 726, 730 (5th Cir. 2010). Contracts that violate legislative enactments are
against public policy, and thus the proper action is to leave the parties where the
court found them. See, e.g., Tracy v. USAA Casualty Insurance Co., No. 11-00487
LEK-KSC, 2012 WL 928186, at *10 (D. Haw. March 16, 2012) (holding that a policy
that violated both state and federal marijuana laws was against public policy and
the proper action was to leave the parties where the court found them); see also 1
Williston on Contracts § 3:3 (4th ed. 2012).
The insurance contract between Guaranty Life and the Investors was illegal
under New Tejas section 1409(c) because it lacked an insurable interest at its
inception. See supra section I.A. This default rule is effective at deterring investors
from engaging in STOLI schemes. Moreover, an exception for the parties not being
in pari delicto is not applicable here because Guaranty Life is less at fault than the
Investors. For the foregoing reasons, Guaranty Life should be able to retain the
premiums consistent with the default rule of contract law.
30
1.
Forcing Guaranty Life to return the premiums would require
the Investors to prove that they acted illegally.
Prior to the existence of STOLI transactions, courts employed contract law in
the context of life-wagering insurance contracts. Insurance Companies Held
Negligent In Issuing Policies To Applicant Without Insurable Interest and
Consequently Held Liable for Wrongful Death of Insured Child Murderer by
Policyholder, 58 Colum. L. Rev. 1087, 1089 (1958). If the insured died and courts
found the contract to be a life-wagering contract, insurance companies could refuse
to pay the premiums on the insured’s death. See, e.g., Nat’l Life & Accident Ins. Co.
v. Alexander, 147 So. 173, 174 (Ala. 1933) (holding that a policy procured by a
beneficiary on his cousin was void as against public policy); see also Home Mut.
Benefit Ass’n v. Keller, 230 S.W. 10, 10 (Ark. 1921) (stating that an insurance
company is not required to pay the premiums on an insurance contract procured by
a beneficiary who was the son-in-law of the deceased).
Subsequently, courts have not required insurance companies to return any
premiums paid under illegal life-wagering insurance contracts. Sec. Mut. Life Ins.
Co. v. Little, 178 S.W. 418, 418 (Ark. 1915). In Little, the plaintiffs took out over
$35,000 of life insurance upon the lives of eighteen individuals through the
defendant insurance company. Id. After an agent for the plaintiffs sold the
interests under the policy to a bank, the Arkansas Supreme Court declared the
contract illegal and void as against public policy for lack of an insurable interest.
Id. The plaintiffs brought suit to recover premiums paid under the policy, but the
court allowed the defendant to retain the premiums. Id. The court acknowledged
31
that maintain a successful claim, the plaintiffs would have to furnish proof of
payment on an illegal contract. Little, 178 S.W. at 418. The court allowed the
insurer to retain premiums paid on the contract by relying on the well-established
rule that “[i]f his claim or right to recover depends on a transaction which is malum
in se or prohibited by legislative enactment, and that transaction must necessarily
be proved to make out his case, there can be no recovery.” Id. (quoting Martin v.
Hodge, 1 S.W. 694, 696 (Ark. 1886)).
Here, this Court should not depart from the traditional conceptions of
contract law. The contract between Guaranty Life and the Investors lacked an
insurable interest at its inception and violated New Tejas section 1409(c). See
supra section I.A. This Court should not attempt to fix the illegal contract between
Guaranty Life and the Investors. Like in Little, forcing Guaranty Life to return the
premiums would require the Investors to prove that they tendered payments on an
illegal life-wagering contract. Therefore, this Court should not require Guaranty
Life to return any premiums.
2.
Allowing Guaranty Life to retain the premiums deters investors
from engaging in illegal life-wagering contracts.
Courts have traditionally applied the default rule of leaving the parties
where they are in illegal life insurance contracts because to do otherwise would
encourage the very behavior they seek to curtail. See TTSI Irrevocable Trust v.
Relia-Star Life Ins. Co., 60 So.3d 1148, 1150 (Fla. 5th Dist. Ct. App. 2011). If
Guaranty Life is forced to return the premiums, then courts would lose an effective
means of deterring investors who unethically gamble on peoples’ lives.
32
In TTSI, an insurance broker and an attorney convinced an eighty-five year
old woman to allow the plaintiff trust to take out an insurance policy on her life
with Relia-Star. 60 So.3d at 1149. On the application, the attorney designated the
plaintiff as owner and primary beneficiary of the policy. Id. Over two years later,
Relia-Star wrote the woman and asked her about her relationship with the plaintiff.
Id. After the woman said that she did not know the listed family trust or individual
trustee, Mr. Kern, Reli-Star conducted an investigation and ultimately cancelled
the policy for lack of an insurable interest. Id. The court declared the policy void ab
initio and allowed Reli-Star to keep the premiums reasoning that “[c]ontracts that
are void as contrary to public policy will not be enforced by the courts and the
parties will be left as the court found them.” Id. at 1150 (internal citations omitted).
While the court in TTSI recognized that contracts void ab initio sometimes
require parties to be returned to the status quo, it emphasized that “[w]e see no
reason to depart from the general rule where, as in the instant case, the party
seeking to enforce the contract is the only party who engaged in deceptive and
misleading conduct at the time the contract was entered into.” Id. Thus, enforcing
the default rule prevents investors from deceiving senior citizens into entering
illegal contracts. This rationale has also been adopted outside of STOLI contracts.
See, e.g., Harris v. Gonzalez, 789 So.2d 405, 409 (Fla. 4th Dist. Ct. App. 2001)
(holding that a contract is void as against public policy between a doctor and seller
where a doctor promised to refer patients to the seller for a percentage of profits).
33
Allowing Guaranty Life to retain premiums would serve to deter the
deceptive behavior of the Investors. Here, like the trust in TTSI, the Investors
engaged in deceitful and unethical behavior: (1) the Investors solicited Sydney to
partake in a pre-arranged deal to immediately assign his interest in his father’s
Policy as seen by the email between Mr. Hightower and Presidential (R. 10.); (2) the
Investors falsely represented that Mr. Hicks had a net worth of $1.2 billion with an
annual earned income of $8.5 million (R. 7.); (3) the Investors falsely represented
that Mr. Hicks lived in an oceanfront property on Jupiter Island, New Tejas (R. 7.);
(4) the Investors fraudulently misrepresented the true intention of the trust and the
reasons behind procuring the policy in the SOCI form (R. 22.)2; and (5) the Investors
executed a transfer agreement with Sydney nineteen days after the Policy became
effective. (R. 8.)
Like in TTSI, returning premiums to the Investors, who engaged in deceptive
and misleading conduct, would only encourage other entities in such unethical
practices. Therefore, as in TTSI, this Court should leave the parties where it found
them especially since Guaranty Life did not engage in any deceptive behavior. In
applying the default rule, the New Tejas insurable interest laws will have more
regulatory force in rooting out STOLI schemes. A ruling to the contrary would
incentivize investors to continue the practice of securing STOLI contracts and
render New Tejas’s insurable interest laws ineffective.
Specifically, the Investors misrepresented that no outside party would pay for the premiums when
Presidential later made payments on the Policy. (R. 11.) Additionally, Sydney stated in testimony
that he never would have agreed to the Policy had an outside party not arranged to reimburse him.
(R. 12.)
2
34
3.
Because the parties here are not in pari delicto, Guaranty Life
should not bear the responsibility for the Investors’ statutory
violations.
Some courts have applied an exception to the default rule if the parties are
not considered to be in pari delicto, or equally at fault. Packard, 624 F.3d at 730.
When parties are in pari delicto applying the default rule is appropriate because
both have acted illegally. Id. However, when parties are not in pari delicto, courts
sometimes apply an exception in which they try to remedy the fact that one party
should bear more responsibility for its illegal actions. Id. Courts have also
recognized that even if parties are not in pari delicto, public policy might demand
that the default rule still should apply if the party seeking a remedy is more at fault
than the other party. See, e.g., Lewis v. Davis, 199 S.W.2d 146, 151 (Tex. 1947)
(noting that “even where the parties are in pari delicto relief will sometimes be
granted if public policy demands it”) (emphasis in original).
For example, the Supreme Court has held that in securities litigation an
exception to the default rule applies to bar an action for damages only when “(1) as
a direct result of his actions, the plaintiff bears at least substantially equal
responsibility for the violations he seeks to redress, and (2) preclusion of suit would
not directly interfere with the effective enforcement of the securities law and
protection of the investing public.” Bateman Eichler, Hill Richards, Inc. v. Berner,
472 U.S. 299, 310-11 (1985). Thus, if a party requests the default rule to be set
aside, the court should require a strong showing that the party is less at fault than
its opponent.
35
Here, although the parties are not in pari delicto, the Investors cannot
demonstrate that they are less at fault than Guaranty Life. The Investors, not
Guaranty Life, were at fault for initiating a STOLI scheme that violated New Tejas
section 1409(c). See supra section I.A. The Investors, not Guaranty Life, convinced
Sydney to take out an illegitimate policy on his father’s life and transfer it
immediately to Presidential. (R. 10.) And finally, the Investors do not dispute the
misrepresentations about the financial status of Mr. Hicks or the worth of his estate.
(R. 11 n.10.)
Conversely, Guaranty Life has not engaged in any action that shares
responsibility for the violation of New Tejas section 1409(c). There is no indication
in the record that Guaranty Life participated in the STOLI transaction with the
Investors. In fact, Guaranty Life tried to remedy the situation by withholding
approval of the transfer between the Trust and Presidential by investigating
whether Sydney transferred the Policy in good faith. (R. 9.) Therefore, not only did
Guaranty Life not participate in the illegal scheme, but it also attempted to remedy
the situation.
Because Guaranty Life bears no fault for the statutory violation, public policy
demands that the default rule apply. If considered under the exception that the
Supreme Court applies in securities litigation, the Investors would be unable to
demonstrate that the default rule should be set aside because it did not bear
substantially less responsibility for the statutory violation. Therefore, Guaranty
Life should be able to retain the premiums paid on the Policy.
36
B.
If this Court Finds That the Policy Was Procured as a Result of Fraud
or Misrepresentation, this Court Should Apply an Exception to the
General Rule of Rescission.
Even if this Court does not find that the Policy is void for a lack of insurable
interest and against public policy, it should find the contract void as a result of
fraud and misrepresentation by the Investors. See supra section I.B. New Tejas
section 1408 provides that “[i]f a representation is false . . . the injured party is
entitled to rescind the contract from the time the representation becomes false.” N.
Tej. § 1408. However, the statute does not explicitly address whether rescission
requires premiums paid under the policy to be returned to the insured. Id.
Rescission of a contract is generally defined by courts as the “unmaking of a
contract.” Abdallah, Inc. v. Martin, 65 N.W.2d 641, 644 (Minn. 1954). Thus, courts
generally will attempt to “abrogate it and undo it from the beginning,” calling for a
return to the status quo. Id. This general rule, however, is not absolute and
exceptions may apply if the rescission is due to the fault of one party. 26 Williston
on Contracts § 68:2 (4th ed.) (2010). The exceptions to rescission include damages
or equitable remedies. Id.
Courts have applied a well-recognized exception for rescission on insurance
policies voided as a result of fraud. See, e.g., Ray v. United States, 121 F.2d 416,
419 (7th Cir. 1941) (plaintiff not allowed to recover premiums on a war risk
insurance contract where policy was procured through fraud of the insured); see
also Hohenschutz v. Knights of Columbus, 186 S.W.2d 177, 178 (Ark. 1945)
(premiums do not have to be returned on a fire insurance policy procured through
37
fraud); see also Taylor v. Grand Lodge A.O.U.W. of Minn., 105 N.W. 408, 414 (Minn.
1905) (misstatements of age on a beneficiary certificate do not require the defendant
from returning premiums paid under the policy). This Court should follow the lead
of other jurisdictions in applying an exception to rescission because such an
exception would effectively deter parties from misrepresenting information on
insurance contracts.
1.
Following other courts, this Court should allow Guaranty Life to
retain the premiums because the Policy was procured as a result
of fraud.
While rescission generally requires returning parties to the status quo, courts
have applied an exception in the context of STOLI transactions procured through
fraud. PHL Variable Ins. Co. v. Lucille E. Morello Irrevocable Trust ex rel. BNC
Nat’l Bank, 645 F.3d 965, 969 (8th Cir. 2011). In PHL, Lucille Morello, a seventyeight year old cosmetologist, loaned money from a third party company, New
Stream, to purchase a life insurance policy from the insurer. Id. at 966. Morello did
so in exchange for money from New Stream and the STOLI scheme lacked an
insurable interest at its inception. Id. at 967. New Stream also misrepresented
Morello’s financial profile to drive up the payout on the policy. Id. The court held
that the insurer was entitled to retain the premiums paid by New Stream because
even though rescission might be a proper remedy, there is an exception whereby
“the insurer is relieved from any duty to return the premium when it was induced
to enter into the contract by actual fraud of the insured.” Id. at 969 (internal
citations and quotations omitted).
38
Consistent with that reasoning, only when there is no finding of fraud will
courts return parties to the status quo by forcing an insurer to return premiums.
See, e.g., Principal Life Ins. Co. v. Lawrence Rucker 2007 Ins. Trust, 774 F.
Supp. 2d 674, 682 (D. Del. 2010). In Principal Life, an insurance policy was voided
by the court for lack of an insurable interest. Id. The court applied rescission as a
remedy and ordered the insurer to return premiums to the trust because there was
no finding of fraud on behalf of the trust. Id.
Here, like in PHL, but unlike in Principal Life, the Investors acted
fraudulently by misrepresenting Mr. Hicks’s financial profile, falsely reporting:
that Mr. Hicks’s net worth was $1.2 billion, that he earned $8.5 million annually,
and that he lived in an oceanfront property on Jupiter Island. (R. 7, 10-11.) The
Investors also made misrepresentations in the SOCI and the Application that the
Policy was a legitimate transaction rather than an illegal STOLI scheme. (R. 17,
22-23.) Furthermore, the Investors made fraudulent misrepresentations to Mr.
Hicks, who was not aware of the creation of the Trust, that the Policy was worth
$20 million, or that the Policy was transferred immediately. (R. 10-11.) Because
Guaranty Life was induced to enter into a contract with actual fraud, it should be
relieved from any duty to return the premiums.
2.
Applying an exception for fraud in this case deters investors
from creating STOLI schemes and wagering on human lives.
This Court should adopt the well-recognized exception for fraud to deter the
behavior of entities that invest in life-wagering contracts. A contrary rule only
serves to endorse a position that fraudulent actions will go unpunished. In this case,
39
the Trust would not be punished for deliberately misleading Mr. Hicks and
Guaranty Life. The Trust would also have no incentive to cease its practices and it
could continue looking for senior citizens to participate in STOLI schemes.
C.
Public Policy Demands That Guaranty Life Be Able To Keep the
Premiums Because It Acted Diligently in Investigating the Contract
and Because Other Remedies Are Inadequate.
This Court should also weigh the culpability of each party when deciding who
should bear the cost of the illegal STOLI scheme. Guaranty Life had no
involvement in inducing Mr. Hicks to enter into the scheme and took proactive
measures by investigating the transfer of the Policy as soon as it suspected ill
behavior. Forcing Guaranty Life to return the premiums will leave it at a loss due
to the administrative costs in initiating the Policy, such as Mr. Hightower’s
commissions, performance of the Policy, and the resulting investigation. If insurers,
who act diligently, such as Guaranty Life, are burdened to carry the losses of illegal
STOLI schemes, then costs will be passed on to the consumers who legally procure
proper policies. See Eryn Mathews, STOLI on the Rocks: Why States Should
Eliminate the Abusive Practice of Stranger-Owned Life Insurance, 14 Conn. Ins.
L.J. 521, 535 (2008) (stating that “[t]herefore, while STOLI may benefit some
wealthy consumers and investors, the costs of treating humans as commodities
adversely affects the entire population and exceeds any benefit received through
these transactions”). Thus, while retaining premiums may seem like a windfall for
Guaranty Life, in reality this remedy protects the vast majority of life insurance
consumers.
40
1.
Allowing Guaranty Life to retain the premiums will not create
an incentive for other insurers to delay investigating suspicious
STOLI schemes or initiating litigation.
Some courts have held that allowing an insurer to retain premiums paid on
STOLI transactions gives the insurance company an incentive to delay
investigating suspicious policies or initiating litigation. Sun Life Assur. Co. of
Canada v. Berck, 719 F. Supp. 2d 410, 418 (D. Del. 2010). In Sun Life, the
defendant helped a senior citizen procure a life insurance policy, which was
ultimately transferred to the defendant. Id. at 412. After litigation over the
agreement was initiated, the insurer believed that the premiums were paid by
secondary market strangers. Id. There was no indication, however, that the
insurance company tried to investigate the source of the payments at that time. Id.
Consequently, the court denied the insurer the opportunity to retain the premiums
and noted that to do so “would have the undesirable effect of incentivizing insurance
companies to bring rescission suits as late as possible, as they continue to collect
premiums at no actual risk.” Id. at 418-19.
Here, Guaranty Life’s actions are distinguishable from the insurer in Sun
Life because it took affirmative steps to investigate the transfer agreement between
the Trust and Presidential. Initially, the transfer occurred on March 7, 2007, but
Guaranty Life was not notified of the transfer for over a year and a half. (R. 8.)
During this time, Presidential made payments on the Policy, but it did so through
the name of the Trust. (R. 8.) Once Guaranty Life was aware of the transfer, it
initiated an investigation and responded to the Investors that it needed to analyze
41
whether the transfer raised any issues related to the initial issuance of the Policy.
(R. 9.) Guaranty Life never processed Presidential’s request to transfer the Policy.
(R. 9.) Guaranty Life also sent a letter demanding production of eighteen categories
of documents to “confirm the accuracy” of representations made to Guaranty Life
during the underwriting process. (R. 9.) Therefore, unlike the insurer in Sun Life,
Guaranty Life did not take a backseat in investigating the Policy. Instead, the
steps that Guaranty Life took in its response demonstrate that it was concerned
that the Policy was procured under an illegal STOLI scheme.
Moreover, Guaranty Life responded swiftly. Guaranty Life responded to the
Trust one month after being notified about the transfer.3 After Presidential
responded with a demand to be declared the owner under the Policy, Guaranty Life
responded within two weeks demanding more information about the transfer.4
Therefore, the concerns shared by the court in Sun Life do not apply here; Guaranty
Life proactively investigated the transfer rather than sitting back and overlooking
the potential illegality of the Policy.
Additionally, Guaranty Life was not stalling litigation so that it could
continue collecting premiums. Even though the Investors ultimately initiated this
On October 21, 2008, Presidential submitted a Designation of Owner and Designation of
Beneficiary form to Guaranty Life stating that Sydney, as beneficiary of the Trust, had transferred
his interest in the Trust, and therefore the Policy, to Presidential. (R. 8, 31-35.) On November 19,
2008, Guaranty Life notified the Trust that it would need to investigate the transfer before
approving the designation. (R. 9, 36.)
4 On December 8, 2008, Presidential sent a letter to Guaranty Life demanding that it be declared the
owner of the Policy. (R. 9, 38.) On December 22, 2008, Guaranty Life responded, requesting
eighteen various types of information to authenticate the Policy. (R. 9, 40-41).
3
42
litigation, they did so in response to Guaranty Life’s December 22, 2008 letter.5
Given the short timeline of the correspondence between the Investors and Guaranty
Life surrounding the transfer, there is no indication that Guaranty Life was
delaying litigation in any way. Therefore, Guaranty Life was not waiting to bring a
rescission suit as late as possible, unlike the insurer in Sun Life.
Although courts have recognized that allowing an insurer to keep premiums
might lead to incentives to delay investigations of suspicious policies, such
incentives did not exist here. Because Guaranty Life diligently and swiftly
investigated the transfer of the Policy, this Court will not create incentives for
insurers to delay investigations and litigation by allowing Guaranty Life to retain
the premiums.
2.
Other remedies available to Guaranty Life are inadequate to
compensate it for its financial loss.
Guaranty Life should not be forced to bear the burden of the illegal STOLI
contract. Without being able to retain the premiums paid, Guaranty Life will never
fully recover from its financial loss. Guaranty Life paid over $1.4 million in
commissions on the Policy to Mr. Hightower that it will never recover. (R. 8 n.4.)
Moreover, there are administrative costs for performing the contract and costs
ultimately associated with being forced to investigate the suspicious transfer of the
Policy between the Trust and Presidential. If this Court were to apply standard
damage remedies, Guaranty Life would be left to bear these excessive costs.
In the December 22, 2008 letter, Guaranty Life threatened legal action within two weeks including
possible rescission of the Policy if Presidential did not produce the necessary information. (R. 9, 4041.)
5
43
Because Guaranty Life is not responsible for the STOLI scheme and proactively
investigated the illegal transfer, the Investors should be the party to bear the loss,
as they are responsible for the illegal nature of the transaction.
This case presents a unique opportunity for this Court to consider the
ramifications that illegal schemes have on insurance industry and its impact on
consumers. If insurers are forced to return premiums paid on illegal STOLI
contracts, they will almost always incur substantial financial losses. These losses
will not only hurt the insurance company as a whole, but will be passed onto
consumers. See Mathews, supra, at 530-31 (stating that “[i]ncreased litigation
costs, coupled with increased regulation and monitoring costs, will drive up life
insurance prices generally”). Therefore, while allowing Guaranty Life to retain
premiums may seem to be an unjust enrichment, this Court would actually be
protecting consumers from bearing the burden of skyrocketing costs of STOLI
schemes.
CONCLUSION
The district court properly granted Guaranty Life’s Motion for Summary
Judgment, holding the Policy void ab initio. In violation of New Tejas section 1409,
the Policy lacked a good faith insurable interest at its inception. The Policy was
procured with the intent to transfer it to a party without an insurable interest, and
Sydney merely served as a proxy for the Investors. Even if this Court finds that an
insurable interest exists, under New Tejas section 1408 and the Policy section 21,
Guaranty Life also maintains the right to void the Policy for fraudulent
44
misrepresentations in the Application and its supplemental materials. Here, the
Application and its accompanying forms were fraught with blatant lies.
The district court erred in denying Guaranty Life’s Motion for Summary
Judgment to the extent that it sought to retain the Policy’s premiums. The
equitable resolution for illegal contracts is to leave the parties where the court
found them, a notable exception to the general status quo rule. Furthermore, if this
Court finds the Policy was procured through fraud, Guaranty Life should be able to
retain the premiums to deter investors from making fraudulent misrepresentations
in STOLI scams. Additionally, Guaranty Life diligently investigated the transfer of
the Policy, and other remedies are inadequate to compensate Guaranty Life for its
loss. Accordingly, Guaranty Life should retain the premiums paid on the Policy.
Dated: November 19, 2012
Respectfully submitted,
/s/ Team # 62
Team # 62
Counsel for Appellee
45
APPENDIX A
New Tejas Insurable Interest Laws
N. Tej. § 1407 – Incontestability
All life insurance policies, delivered or issued for delivery in this state, shall
contain in substance a provision stating that the policy shall be incontestable
after being in force during the life of the insured for a period of two years
from its date of issue, and that, if a policy provides that the death benefit
provided by the policy may be increased, or other policy provisions changed,
upon the application of the policyholder and the production of evidence of
insurability, the policy with respect to each such increase or change shall be
incontestable after two years from the effective date of such increase or
change, except in each case for nonpayment of premiums or violation of policy
conditions relating to service in the armed forces.
N. Tej. § 1408 – Rescission
If a representation is false in a material point, whether affirmative or
promissory, the injured party is entitled to rescind the contract from the time
the representation becomes false.
N. Tej. § 1409 – Insurable Interest
(a)
An insurable interest, with reference to life and disability insurance, is an
interest based upon a reasonable expectation of pecuniary advantage through
the continued life, health, or bodily safety of another person and consequent
loss by reason of that person's death or disability or a substantial interest
engendered by love and affection in the case of individuals closely related by
blood or law.
(b)
An individual has an unlimited insurable interest in his or her own life,
health, and bodily safety and may lawfully take out a policy of insurance on
his or her own life, health, or bodily safety and have the policy made payable
to whomsoever he or she pleases, regardless of whether the beneficiary
designated has an insurable interest.
(c)
An insurable interest shall be required to exist at the time the contract of life
or disability insurance becomes effective, but need not exist at the time the
loss occurs.
A-­‐1 APPENDIX B
Amended New Tejas Insurable Interest Law
N. Tej. § 1409 – Insurable Interest (Amended August 28, 2009)
(a)
An insurable interest, with reference to life and disability insurance, is an
interest based upon a reasonable expectation of pecuniary advantage through
the continued life, health, or bodily safety of another person and consequent
loss by reason of that person's death or disability or a substantial interest
engendered by love and affection in the case of individuals closely related by
blood or law.
(b)
An individual has an unlimited insurable interest in his or her own life,
health, and bodily safety and may lawfully take out a policy of insurance on
his or her own life, health, or bodily safety and have the policy made payable
to whomsoever he or she pleases, regardless of whether the beneficiary
designated has an insurable interest.
(c)
An insurable interest shall be required to exist at the time the contract of life
or disability insurance becomes effective, but need not exist at the time the
loss occurs.
(d)
Trusts and special purpose entities that are used to apply for and initiate the
issuance of policies of insurance for investors, where one or more
beneficiaries of those trusts or special purpose entities do not have an
insurable interest in the life of the insured, violate the insurable interest
laws and the prohibition against wagering on life.
(e)
Any device, scheme, or artifice designed to give the appearance of an
insurable interest where there is no legitimate insurable interest violates the
insurable interest laws.
(f)
This section shall not be interpreted to define all instances in which an
insurable interest exists.
(g)
The 2009 Amendments are not to be applied retroactively.
B-­‐1 APPENDIX C
Excerpt from the Policy
Section 21: Incontestability
This policy shall be incontestable after it has been in force during the
Insured’s lifetime for two years from the Issue Date, except for nonpayment of
premiums or violation of policy conditions relating to service in the armed forces.
While insurance is contestable, we may either rescind the insurance or deny
a claim on the basis of:
1.
A misstatement in the application or supplemental application for this
policy or any face amount increase; or
2.
A misstatement in the reinstatement application if there has been a
reinstatement of this policy.
If we contest the validity of all or a portion of the face amount provided under
this policy, the amount we pay with respect to the contested amount will be limited
to the higher of a return of any paid premium required by us for the contested face
amount or the sum of any Monthly Deductions made under this policy for the
contested face amount.
C-1